“ The law requires a reserve study , including a visual inspection , every 3 years and financial updates annually ”
Top Three Reserve Study Questions to Ask Yourself by Damian Esparza
Why do we need a Reserve Study ?
In the state of California the law requires a reserve study , including a visual inspection , every 3 years and financial updates annually to prepare the Assessment and Reserve Funding Disclosure . Otherwise known as the “ reserve disclosure ,” this document provides a snapshot of the homeowner association ’ s ( HOA ) financial condition , and it answers the looming question , “ Will the community require a special assessment in the future ?”
Currently , many lenders and realtors now review the reserve disclosure in the real estate transaction process , and more importantly FHA guidelines now require review of reserve funding levels when communities apply for FHA certification . We hear that the “ whisper number ” for percent funding is 60 % and this percentage may become official as lending requirements become more stringent . In other words , the percent funding number is becoming similar to a FICO score for the HOA ’ s financial condition .
Not only is the reserve study important because it ’ s the law and it helps protect your property value , but it also helps board members make good budget decisions . For volunteer homeowners who select to serve on the board of directors they have a fiduciary responsibility to make decisions in the best interest of the community and rely on experts to mitigate their liability . This sometimes results in making tough decisions especially when this involves raising assessments to cover current or future replacements or repairs .
An accurate and complete reserve study is the greatest tool a Board of Directors can have in regard to preparing an association for future major expense requirements as well as maintaining property values .
“ The law requires a reserve study , including a visual inspection , every 3 years and financial updates annually ”
What qualifications should you look for when hiring a Reserve Preparer ?
Some of the designations a potential client should look for include , but are not limited to : Reserve Specialist ( RS ) from Community Associations Institute ( CAI ;) the Professional Reserve Analyst ( PRA ) from the Association of Professional Reserve Analysts ( APRA ), general contracting license , architectural and engineering degrees , building inspector experience and other construction related fields .
The CAI Reserve Standards establish both requirements for the various levels of investigation necessary to prepare Reserve Studies and minimum content of Reserve Reports .
What are the different levels of service available ?
Three Levels of Service that define the various types of Reserve Studies :
• “ Full ” Reserve Study , which must include a Component Inventory , Condition Assessment ( based on on-site visual observations ), Life and Valuation Estimates , Fund Status , and a Funding Plan .
• “ Update , With-Site-Visit / On- Site Review ” consisting of a Component Inventory ( verification only , not quantification ), Condition Assessment ( based on on-site visual observations ), Life and Valuation Estimates , Fund Status , and a Funding Plan .
• “ Update , No-Site Visit / Off-Site Review ” limited to Life and Valuation Estimates , Funding Status and a Funding Plan .
The minimum content of a Reserve Report includes :
• A summary of the association ’ s number of units , physical description , and Reserve Fund financial condition .
• A projection of Reserve Starting Balance , recommended Reserve contributions , projected Reserve expenses , and projected ending Reserve Fund Balance for a minimum of 20 years .
• A tabular listing of the Component Inventory , component quantity or identifying descriptions , Useful Life , Remaining Useful Life , and Current Replacement Cost .
• A description of the methods and objectives utilized in computing the Fund Status and development of the Funding Plan .
“ An accurate and complete reserve study is the greatest tool a Board of Directors can have in regard to preparing an association for future major expense requirements as well as maintaining property values .”
• Source ( s ) utilized to obtain component Repair and Replacement cost estimates .
• A description of the Level of Service by which the Reserve Study was prepared .
• Fiscal year for which the Reserve Study is prepared .
Damian Esparza Barrera and Company , Inc . 2207 Garnet Ave ., Suite H San Diego , CA 92109 ( 858 ) 722-7512 Damian @ BarreraCo . com www . BarreraCo . com
14 | The HOA Board Quarterly | Issue # 2 | Spring 2012 Spring 2012 | Issue # 2 | The HOA Board Quarterly | 15